Published 4:00 am, Thursday, April 15, 1999

Nudging aside the Public Utilities Commission, state legislators this week asserted jurisdiction over the proposed transfer of Pacific Gas and Electric Co.'s vast hydroelectric generating system to an unregulated sister company.

The Legislature's intervention underscores its desire to take a broad look at an issue cutting across a myriad of water and power interests. It also nips recent efforts by PG&E to cut a deal with water agencies and environmental groups outside the regulatory process.

In November, PG&E notified the PUC that it wanted to transfer its massive system of 68 powerhouses and 94 dams on 16 California river systems to an unregulated sister company, U.S. Generating Co. of Bethesda, Md. The transfer would include about 140,000 acres of forest where generations of Californians have hiked, camped and picnicked.

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Taking a dim view of discussions spearheaded last month by PG&E under confidentiality agreements, some legislators said they want a public airing of the issues with participation from all interested parties.

Weekly hearings begin at 11 a.m. next Thursday before the Senate Energy, Utilities and Communications Committee. They are expected to explore the proposed divestiture's impacts on water and land use, fisheries, agriculture, recreation and the state's emerging competitive electricity and water markets.

"We have to start fresh to see how the needs of these competing interests should be addressed by the state," said state Senator Debra Bowen, D-Marina del Rey (Los Angeles County), chairwoman of the Senate Energy Committee, which will conduct the hearings. "The Legislature is the only place where the full range of issues can be explored."

The proposed transfer alarmed onlookers for several reasons. Some consumer advocates feared the utility would be allowed to "lowball" the value of the assets, shortchanging ratepayers who are entitled to receive payment for the system, which was created during the past century under the protective shield of monopoly regulation.

The hydroelectric system is carried on the books with a value of $1.4 billion but is likely worth more than twice that amount.

Others feared U.S. Generating Co., motivated by a desire to make a lot of money in a new electricity marketplace, would disrupt an arrangement that historically has put water users' needs ahead of electricity consumers' needs.

Not only water consumption is of concern. There's also an issue about how water is used to create electricity. There's competition for the water by different users.

Farmers need extra water in early summer so their crops can grow. Fish need extra water in autumn for spawning. But power prices peak in late summer, providing incentive for a hydroelectric system operator to hoard water until prices spike.

Hoping to reach agreement with groups like the water-agency association, PG&E began negotiations last month that quickly ran into difficulty. Some public water agencies objected to confidentiality agreements put forward by PG&E that appeared to limit participation and could have prohibited them from talking to other public officials. Others felt participation was being restricted and controlled under a strategy that offered some participants environmental safeguards and concessions in exchange for dropping opposition.

PG&E executives say that wasn't the case.

"I would hate to see a negative spin put on the process," said Leslie Everett, a PG&E vice president working on the hydro case. "We thought we were on the road to a fair and open process."

But, with the Legislature's intervention, the matter becomes moot and private discussions have ended.

"We're going to defer to the Legislature and support their process," Everett said yesterday.

Water rights and water usage are expected to receive a great deal of attention at the hearings. California has enjoyed five years of above-normal rainfall. But if rainfall were at the historic average level, right now, the state would experience a water shortage of 1.6 million acre-feet of water, according to the Department of Water Resources.

By 2020, the state is expected to add 15 million residents to its current 32 million, creating an annual deficit of 2.4 million acre-feet of water in normal-rainfall years. Meanwhile, PG&E sits atop a system controlling the flow of 11 million acre-feet from the Sierra Nevada in a typical year.

"Water is a critical issue," says state Senator Jim Costa, D-Fresno, chairman of the Agriculture and Water Resources Committee. His committee is expected to participate in the inquiry and help draft comprehensive legislation. "PG&E's system generates 5 percent of the state's electricity . . . but it also has a lot of control over water quality and water supply."

Until this week, the PUC was working to set a value for the hydroelectric network and was wrestling with whether an auction or appraisal method would work best. Now it's waiting for direction from the Legislature.

"It's clear that the Legislature can take a broader view of the issue than we can," said Richard Bilas, president of the PUC. "I told Senator Bowen that if she wanted to take charge, then go ahead. This goes way beyond the issues we normally deal with."